Leonard Raymond – Potential for abuse
The reverse mortgage industry is on target for a record year, according to a national association of industry professionals, but even after the group’s best efforts at promoting this type of loan, it has a long way to go before gaining significant market share. Increasing reverse mortgage volume may be even more of a challenge in Massachusetts, which carries strict regulations relating to the controversial loans on its books and where industry watchers say the relatively low number of transactions deters many lenders from offering such products.
The National Reverse Mortgage Lenders Association has projected that by the end of the year, total volume will reach about 10,000 home equity conversion mortgages, compared with 6,650 last year.
HECMs are insured by the Federal Housing Administration and flow through Fannie Mae, which has reported acquisition volume of about 1,000 loans a month, said Peter Bell, president of the NRMLA. While increasing, the number of reverse mortgages is still small compared to many other types of loans.
It’s a drop in the bucket compared to the demographics, if you look at the senior population, Bell said.
And in the commonwealth, reverse mortgages have never been popular.
Bell attributes overall growth to a variety of causes. Chief among them is a fairly intensive consumer education campaign by the association that kicked off last year and resulted in a number of major media outlets reporting on reverse mortgages.
Additionally, many senior citizens live off an income generated from interest-bearing investments, CDs for the most part, said Bell. As those CDs mature and people roll them over, they’re rolling them over into much lower-yielding instruments. So, we’re getting more and more calls from either seniors themselves or from financial advisors who are looking at the reverse mortgage as an option for supplementing the income that’s diminished as a result, he said.
Because of current high home values, reverse mortgages have the potential to yield more money than any other time in history, said Bell.
The typical borrower for a reverse mortgage was a single female in her mid- to late 70s. But Bell expects that demographic, identified by the association a few years ago, to change when the information is again compiled at the beginning of next year. He expects to see more couples obtaining reverse mortgages.
Consumer attitudes about reverse mortgages are also shifting, said Bell. Up until a couple of years ago, the reverse mortgage was viewed as a loan for people who were financially hard pressed … It was a tool of last resort, he said. Today, borrowers are making a discretionary decision, using the equity in their homes to live more comfortably, said Bell.
But Leonard Raymond, director of the Homeowner Options for Massachusetts Elders, a nonprofit agency, said reverse mortgages shouldn’t be used for frivolous reasons.
They’re healthy when they’re 65, but at 79 they’re now needing home care but their equity is tapped out. Where do they go? We want people to think of these things, he said.
Obtaining a reverse mortgage and stripping the equity from a home to fund non-essential purchases is something Massachusetts frowns on in both regulation and practice.
Statutes regarding reverse mortgages were placed on the books in 1989 and revised in 1998, according to Massachusetts Division of Banks counsel Joseph Leonard.
‘Good Requirement’
The requirements include third-party counseling by an agency accredited by the secretary of elder affairs, a seven day cooling off period in which the loan can be dissipated for any reason and the requirement that any institution wishing to offer reverse mortgages has to submit a plan to the commissioner. According to the Office of Elder Affairs, only four Bay State agencies have been certified to give counseling.
Boston-based HOME is one agency that makes it clear their first priority is to seek out non-loan options for seniors that need money. Additionally, they extend their plan for reverse mortgages to more than 60 banks that participate in their program.
Raymond has waged a campaign of his own to counteract the ageism he says results in reverse mortgages being thought of as the only alternative for those over 60.
According to a recent proposal, HOME has generated just 1,829 reverse mortgages since its beginning 18 years ago. Raymond said his organization counsels about 2,000 clients a year but takes care to differentiate his organization from other so-called counseling agencies around the country, which may only send out a pamphlet or speak to people over the phone. HOME’s agents visit people in their homes and the average initial visit lasts two hours.
We’ve certainly had a distinct rise in the number of people inquiring about them [reverse mortgages]. But for us, we’ve maintained the same percentages, said Raymond. Non-loan solutions are usually worked out for seven out of 10 clients, he said.
Out of the three out of 10 who end up with a loan transaction, maybe one out of 10 will end up being a reverse mortgage and the others will be another transaction that we do, he said.
The counseling is a good requirement because it really helps you come to grips as to [whether] you need to use the most valuable asset you have at that point in your life – your home – and do you have to use up the equity by getting a reverse mortgage … is your need of such financial consequence that you have to put up your home, said Leonard.
In some instances, the answer is yes, according to Raymond. While the additional marketing push for reverse mortgages is welcome by Raymond, that is only because it informs the public about another product available to them.
It’s also an area where there’s a potential for greater abuse. We don’t feel that seniors, for instance, should utilize reverse mortgages for premature inheritance; we don’t think they should use their home for venture capital, for risky investments, said Raymond.
Elders, defined as those aged 60 and over, should be careful about long-term planning, something many people stop doing when they reach retirement. Someone that’s in their 60s or 70s, they’re probably talking about a 15- or 20-year lifespan left on the home and there’s the issue of equity depletion, he said.
Retaining the equity in a home becomes increasingly important when costly home care is required, an increasing occurrence given today’s longer life spans. Raymond said average costs for in-home care for his clients are about $6,500 a month, with one client experiencing a cost of $18,000 in one month.
Local lenders say they welcome the additional counseling requirements for reverse mortgages but few participate in the programs to any great degree.
Robert J. Petrelli, president of Weymouth-based Mount Vernon Mortgage Corp. and recently inducted chairman of the Massachusetts Mortgage Association, said he receives only one or two inquiries each year about reverse mortgages.
I’ve done a lot of research on this, he said. In checking with a number of other people, I’ve yet to find anybody that’s done any [reverse mortgages] or has yet to market these programs.
Leonard concurred regarding the lack of interest, saying that a few lending institutions requested permission from regulators to offer reverse mortgages when the law changed in 1998 but, in the last year, there has been little activity.
It’s clearly a specialty niche product, said Daniel J. Forte, president of the Massachusetts Bankers Association.
The fact that few Massachusetts banks offer reverse mortgages is not surprising to Forte. I think a lot of it depends on the demographic of the individual banks, he said. Additionally, it’s such a narrow band of demand that instead of dedicating employees to the three or four loans that may result a year, it’s easier for a bank to refer a customer to a participating bank or to HOME, he said.
Despite the best efforts of the NRMLA, reverse mortgages may ultimately suffer at the hands of society. One of the real problems we have here is there’s a sea change in the financial condition of seniors over the years, said Raymond. When HOME got its start nearly 20 years ago, elders didn’t have credit cards and very few ever refinanced. Most people paid off their homes.
Today that doesn’t exist anymore. What we see is the vast majority of seniors have refinanced over the years. They’ve got large amounts of consumer debt and it’s a real problem, he said.
